There’s a new series of Dragon’s Den on TV, but very little has changed. Very little has changed in the 16 years that it’s been on the TV.
Dragon’s Den infuriates me. It is probably the most high-profile business show on TV. It should be about encouraging and championing entrepreneurship. It should be about how lucky and privileged the Dragons are to get to meet driven, ambitious people at the start of their journeys and not about how lucky the entrepreneurs are to be in a room with 5 people rifling through their piles of cash.
Here are 7 reasons why the concept is broken:
The way that companies are valued on Dragon’s Den is simply wrong. It normally works something like this;
Entrepreneur: I value my company at £500k and want £100k investment
[Lets assume no negotiation to make this easier]
Dragon: I will invest £100k for 20% of the company.
Everyone thinks that’s right because £100k is 20% of £500k, but it is wrong. It would be right if the Dragon was buying the equity from the entrepreneur and the entrepreneur was keeping the cash, but they are not, the money goes into the company, not to the entrepreneur. This means that if you start with a valuation of £500k and the Dragon puts £100k in the company is now worth £600k. The Dragon’s share is equal to the amount of money they put in. This means that the Dragon gets 16% of the company (£100k is 16% of £600k). In technical terms this is the difference between a “pre-money” valuation and a “post-money” valuation. I accept that this might make the TV show confusing, but it is only confusing because the show has effectively taught the nation badly. Although this is arguably a technicality, with the rise of crowdfunding, it would be great to have a show that explained properly how investments works.
Profitability of small companies
You know the questions; “What’s your turnover?”, “What’s your profit?” etc and this is what the companies are judged on. Why’s that wrong? you may ask, aren’t companies suppose to make profit? Well, the answer depends on what kind of companies you are looking at, what the size of the company is and what the goal of the company is.
If you have a lifestyle business, designed to create an income for you and your family to live off, and it turns over £500k, then yes, you should be making a profit… and then paying some of the profit to yourself in dividends to fund your lifestyle. That’s the point of it.
If you are running a £500k turnover business and you are looking for investment, then no, you should not be making a net profit, any net profits should be put back into the business to grow the business. Why would you be asking for someone else to put money into the business if you haven’t already re-invested the company’s profits? Companies should have a good gross profit to show that they are scaleable, but not a net profit. There are possible exceptions such as investment to fund cash flow or capital expenditure, but this rarely comes up on Dragon’s Den and if you have a profitable company that needs money for cash flow or capital expenditure there are many other options you should look at before giving away equity.
From memory, it was James Caan who first offered entrepreneurs some of their equity back after they pay back the money. Normally it goes something like this:
Entrepreneur: I’ll give you 10% of my company for £50k
Dragon 1: I’ll take 15% of your company for £50k
Dragon 2 (competing): I’ll take 15% of your company for £50, but “drop down” to 10% if I get my money back in 2 years.
Does anyone ever take a minute to think what that means?
Firstly, it means that the company will have to have enough free cash flow to pay back £50k within 2 years. If that was possible it shouldn’t need the investment in the first place, and the Dragon should know this.
Secondly, the Dragon gets 100% of his investment cash back in 2 years and KEEPS 10% of the entrepreneur’s company, which he’s essentially got for free. It’s a massive con
Catching people out
The Dragons seem to revel in catching people out, especially with their numbers. At the same time, they say that they should get disproportionally higher equity for their cash than other investors because they are there to help. This is a ridiculous contradiction. The people who you can ‘catch out’ are the people who most need the help. The people who have all the answers are the people that need the least help.
Plus, does good memory and mental arithmetic make you good at business? No! I get that it wouldn’t make great TV for the entrepreneurs to be opening spreadsheets on their laptops to answer the questions, but in real life, in a real business, you have access to tonnes of data and it’s not the person who memorises it the best who is likely to be more successful, it’s the person that can read, analyse and understand it.
The value of contacts
I have managed to get products listed in some of the top retailers in the UK; Sainsbury’s, Tesco, Waitrose, Pets at Home etc. I have never done this with any high-level “contacts”. My team and I have done this by developing products that we know consumers want, working out where they should be sold, finding out who is the right buyer at the right retailer and working with the buyer to know what success looks like for them, and how we can contribute to it.
A buyer in your sector does not want to be told by their boss that they have to stock a product because their boss’s boss played golf with Duncan Banatyne. They want to work with you to stock products that they believe in, that will help them grow their categories.
Whilst it may be helpful that a Dragon like Peter Jones understands what it takes to work with supermarkets because he sells a lot of Reggae Reggae sauce, it’s very unlikely that he directly has anything to do with the buyer, and even more unlikely that the category buyer for sauces is the same as the category buyer for whatever product you are pitching.
It’s not difficult to find out who the buyer is for your sector, in the retailers you want to get into, and they want new, exciting products. If you have a great product you need to be pitching to buyers, not Dragons.
The Dragons time
The big sell of the show is getting a Dragon “on board”, but how much time do you really get from them?
Take Tej Lelvani as an example. He runs Vitabiotics with a turnover of £300m. His website lists 10 investments on top of this. It also lists 8 charities that he is involved with and his media appearances. How much time could he possibly have to dedicate to a small company in which he has a minority investment?
And if the pitch from the Dragons is about how much help and time they are going to give, why do we never see this as part of the investment offer? Why don’t we see the Dragons competing for investment based on the hours that they promise to give to the entrepreneurs?
This is something I would truly love to see. In my experience, the right knowledge can be a hundred times more valuable than cash.
Brands just use the show for PR
From my understanding, a high proportion of the deals done on the show don’t actually go through. It’s normal that some would fall apart in due diligence, but that doesn’t seem to be the reason. I know of one entrepreneur who went on the show, accepted investment offers, then turned them down off-air and did more in sales on his website the day the show aired than he was offered by the Dragons, and he kept his equity. I’ve seen plenty of others turn up on crowdfunding platforms like SEEDRS and Crowdcube, using the publicity from the show to get crowd investments. I think that’s a great thing, I think it’s great for the entrepreneurs, but why not build it into the show? It would make a far better show. It would be more honest.
Dragon’s Den is the X-factor of the TV world, where the judges hold the power and often belittle the contestants. We need a business show that is The Voice, where the talent has more power, and where those with experience are mentors, not judges, there to help the next generation of entrepreneurs.
And if you are a TV exec reading this… yes, I do have an idea for how that could look. Just get in touch!